Forex is the buying of one currency and the selling of another concurrently. Typically, the major currencies—the British Pound (GBP), the Euro (EUR), the Japanese Yen (JPY), and the Swiss Franc (CHF)—are traded against the US Dollar (USD). Trade pairs in which the USD is not included are called cross pairs.
The currency pairs are expressed with a base currency as the first part of the pair, followed by the quote currency. (For example, USD/JPY would be the US dollar as the base against the Japanese Yen as the quote.)
Accompanying the currency pair is the quote, or bid/ask price.
This is expressed in the following format: EUR/USD : 1.2836 1.2839.
The first number in the series represents the bid price, the cost of selling the Euro against the Dollar, or going ‘short' on the Euro. The second number is the ask price, the cost of buying the Euro against the dollar, or going ‘long’ on the Euro. The difference between the bid/ask price is called the pip spread.
A pip is the smallest unit of measure for any currency. In most currencies, this is the fifth digit, or the fourth after the decimal point; in dollars, each pip is equivalent to one-hundredth of a penny. One important exception is the Japanese Yen, in which each pip is the second unit after the decimal point, meaning each pip equals one cent.
EXAMPLE OF AN FOREX TRADE :
If you think that the Euro will rise relative to the U.S. Dollar, you would buy one lot of the EUR/USD currency pair:
The EUR/USD is trading at 1.2553 when you buy it.
The EUR/USD is trading at 1.2674 when you sell it.
You bought at 1.2553 and sold at 1.2674 for a profit of .0121 or 121 pips.
Each pip is worth $1 in 10,000 Quantity. 121 pips x $1 = $121 profit
In FOREX, you also have the opportunity to short (sell first) a currency pair if you think it will fall in price.
If you think that the Euro will fall relative to the U.S. Dollar, you would sell one lot of the EUR/USD currency pair:
The EUR/USD is trading at 1.2659 when you sell it.
The EUR/USD is trading at 1.2523 when you buy it.
You bought at 1.2523 and sold at 1.2659 for a profit of .0136 or 136 pips.
Each pip is worth $1 in 10,000 Quantity. 136 pips x $1 = $136 profit
While these are profitable examples, a trader could have lost the same amount by being on the wrong side of the trade.
